Expert Commentary

Captive Insurance Exit Strategy

Captives and interest in them continues to grow. This behooves an examination of what happens when the captive's useful life is at an end, voluntarily or otherwise.

November 2007

Prospective captive owners always rightfully ask: How could this captive fail? How do we wind it up? What is the exit strategy? These are all good questions which should be carefully examined.


As to the first question, it has been my experience that there are two primary reasons for the failure of a captive. The first may be obvious, and that reason is undercapitalization. Often prospective captive owners look at the minimum capital requirements of a domicile and the minimum surplus requirements computed by an actuary and believe that those amounts are sufficient.

This where usual and customary business life comes into play. Most of us would agree that seldom do the best-laid plans cost what we project, nor do they follow the forecasted timeline. When you are building a house and delays and extra expenses occur, you can cut out the pool; when it is an insurance company you are building, you can’t cut out the claims or reserves. And it isn’t your call anyway. The regulators will decide how much more may be needed.

So, planning for the minimum capital and surplus as your maximum invested is risky. You can be asked to put in more money. You may choose not to do so, but that brings a different set of issues.

Ownership Issues

The second major reason for failure of a captive is the mis-, mal-, or non-feasance of ownership. This takes a variety of forms from inattention in operating the captive to actually raiding the bank accounts. No matter the size of your basic business, mom and pop or Fortune 500, starting a captive is starting a new line of business, a new company, and it requires the active involvement of key decision makers. The captive manager does not and should not be making strategic decisions. That is the responsibility of the owner.

It may seem preposterous but it has happened that a captive’s owner(s) decides that the money that they put into the captive is still theirs with no further obligations and decides to withdraw it for other purposes. Of course, this action brings them into direct conflict with managers and regulators, fronts, and reinsurers, but by the time the action is visible, it may be too late to change the course of events.

Exit Options

Regardless of the route to "The Close," what happens when the decision is made to close up shop? A salient feature of an insurance company is the fact that at the moment one policy has been written, the company is alive until all claimants, actuaries, auditors, and regulators are satisfied that there are no further obligations. Funding becomes required for the duration unless you can find a way to transfer the obligation.

There are companies and individuals who will offer to acquire the captive, and work to close the remaining claims for less than the reserves and pocket the difference. If you are highly skilled and diligent this can be a lucrative line of business.

You may ask, why wouldn’t the original owner close down the captive? Why not make the money oneself? Principally this gets into business models, focus, and entrepreneurship. If your captive is an important but marginal part of your business, you may not wish to take the time and energy to perform the work necessary to close it down, profit or not.

Another situation is mergers and acquisitions. If Company A purchases Company B, which has a captive, Company A may not view the captive as important and may not want to devote the time to deal with captive issues. All of which can open opportunities for an entrepreneur.


Should the decision be made to perform the work necessary to close the captive yourself, you will need to acquire detailed information on the outstanding claims, reserves, and funds or security held to cover them. Then it will be necessary to conduct negotiations with fronting and reinsurance insurers and regulators to have reserves taken down, claims settled and closed, and funds released.

Once again, in the captive field, it is wise to work with knowledgeable professionals in every phase. Ending the use of a captive is not so simple as ceasing to do business with it or funding its operations. There can be an orderly cessation but it takes planning and thought, as always.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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